7.2 Revenue from Sales

7.2.1 Revenue Recognition at the Time of Sale

The conditions for recognising revenue in relation to the sale of goods are usually met by the time the product or merchandise is delivered, or the services are rendered to customers.

Sales revenue from cash and credit sales is recorded when earn, the entry to record the sale of merchandise on credit requires two entries, as follows:

Dr  Accounts receivable              xxx

   Cr  Sales  xxx

Dr  Cost of goods sold xxx

   Cr  Inventory xxx

7.2.2 Sales Return and Allowances

Many business allow customers to return inventory (sales return) or to keep the inventory and deduct an amount from the sales price (sales allowance). A sales allowance is usually given on inventory due to minor defects, breakages, spoilage, inferior quality, or shortage in shipment, for example.

7.2.3 Trade Discount

There are two types of discount: Trade discount and Cash discount.

A trade discount is a reduction in the cost of goods owing to the nature of the trading transaction. It usually results from buying goods in bulk.

(a) Trade discounts received should be deducted from the gross cost of purchases.

(b) Trade discounts allowed should be deducted from the gross sales price, so that sales for the period will be reported in the trading account at their invoice value.

7.2.4 Cash Discount

A cash discount is a reduction in the amount payable to the supplier, in return for immediate payment in cash, by credit card or by other electronic payment, rather than purchase on credit, or for payment within an agreed period. Cash discounts for early payment provide an incentive for customers to pay their accounts early.

The seller grant a cash discount called discounts allowed: offered by the business to their customer. The buyer receive a cash discount called discounts received: received by a business from their supplier.

To the seller, a discount allowed represents an expense that must be deducted from income to determine profit.

    Dr  Discounts allowed (SPL)     xxx

      Cr  Accounts receivable (SOFP) xxx

The purchaser, on the other hand, records the purchases discount in an account called discount received, which represents an item of income to the purchasing entity.

     Dr  Accounts payable (SOFP) xxx

       Cr  Discounts received (SPL) xxx